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Guidelines for inviting Tariff Based Bids

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P. ABRAHAM
SECRETARY

D.O No. A-53/95-IPC-I June 3, 1997

June 3, 1997

Dear Shri

The Government of India announced major policy reforms in Oct= 1991 widening the scope of private sector participation in power generation. A particularly significant aspect of the policy was the notification of the two part tariff guidelines which clearly set out the principles for tariff computation from private power generating companies.

2. The philosophy underlying the existing two part tariff formulation was that of cost reimbursement plus a permissible return on equity investment. In implementing this tariff policy, determination of reasonableness of capital cost, approval of interest rates on local and foreign debt, the period of loan, the extent of foreign exchange protection etc. and the fixation of operating parameters within the prescribed ceilings, identifying deemed generation provisions, extent of despatchibility, level of incentive payments, tax being a pass through in incentive, extent of working capital permissible, premium on fuel prices for assured supply, fuel supply and transportation risk issues, extent and escalation of O&M and insurance expenses permissible, extent of maintenance spares permissible, rebates in tariff for prompt payment etc. became issues of protracted negotiation. Hence, even after the capital costs are frozen by the Central Electricity Authority, the tariff streams for the IPP remain infirm and get finalized after very protracted negotiations.

3. When the power sector was opened up for private investment in 1991, the MOU route with a cost plus approach was adopted to attract investment. However, as we learnt about the intricacies of the private power development emphasis was laid on adoption of competitive bidding for project development and necessary guidelines to this effect were issued to States along with the reference documents required for bid solicitation. We continued with the concept of cost plus approach as the details of an alternative tariff structure had not been firmed up. Government of India constituted an Inter-Ministerial Committee under the Chairmanship of Secretary (Power) to examine the existing tariff structure for private power projects and suggest the alternative tariff structure addressing the concerns of the States and the developers. The Committee had several rounds of discussions in which representatives from States were also invited. The draft report of the Committee was also circulated to the States soliciting their views/comments. Based on the recommendations of the Committee, an alternative tariff structure has been finalised for tariff based bidding process. It is essentially an availability based bulk power tariff structure for the private power projects. The tariff structure recommends bid evaluation on the basis of levelised tariff (for fixed cost components), escalable and non-escalable components in the fixed cost and certain operational parameters such as Heat Rate, Auxiliary Consumption etc. RFQ and RFP procedure has also been recommended for award of project. Certain guidelines for preparation of project for bid solicitation and a fixed time schedule for bid evaluation has also been recommended.

On the basis of the Report of the Committee on >Alternative Tariff Structure for Private power Projects= necessary notification for tariff based competitive bidding has been issued for publication in the Gazette. A copy of the notification and the guidelines for inviting tariff based bids are enclosed with this letter.

With best wishes

Yours sincerely,
Sd/-
(P. Abraham)

Chief Secretaries -- All States
Secretary (Power/Energy) -- All States/ Chairman SEBs-- All States
Chairman CEA,
Ministry of Finance (DEA/Expenditure)/Industries, Planning Commission
CMD, CPSUs/ All IFIs

 


 

Guidelines for Inviting Tariff Based Bids

1.0 Tariff Structure. The existing cost plus tariff mechanism is not ideally suited for competitive bidding as this would require bidding on every element of cost of generation which becomes difficult to verify and monitor over the life of the PPA. Furthermore, the nature of costs for IPPs is very different from public sector power project costs and, in the absence of complete knowledge of the cost profile, it is almost impossible to design a competitive bidding process, based on cost plus approach, that is fair to both sides and can elicit good investor response. In realization of this, the >Alternative Tariff Structure= aims at obtaining competitive offers for cost of supply to the utility. Since the utility is primarily interested in low cost service, they should evaluate offers on the basis of this aspect allowing the project sponsors the flexibility to structure the project costs in a manner that he is comfortable with so as to offer the most competitive price for electricity generated. However, the SEBs must ensure that a reasonably good field of participants are brought in the fray as only this will enable lowest tariffs to be obtained through competition.

As the IPP sells all its output to the SEB and not to the market, the IPP can not take market risk. This necessitates the revenue to be broken up into two streams. The fixed or capacity charge covering the payment received by the IPP for making generating capacity available to the SEB (irrespective of actual despatch by the SEB). This is essential because the capital investment is dedicated to the SEB and the IPP can in no way market underutilized capacity at a short notice. The second part is the variable or energy charge which is basically compensation of fuel cost for electricity actually purchased by the SEB. In keeping with this philosophy, it is proposed that for a specific project, SEBs can invite bids covering the Fixed expenses and the Variable expenses as elaborated below:

1.1 Fixed/ Capacity Charge: Fixed/Capacity Charge in Rs./MW per year for a contracted availability level. As lenders and sponsors are unwilling to accept exchange rate variation risks and inflation risks, SEBs may ask bidders to specify the percentage of the fixed charge they would like to denominate in foreign currency for purposes of exchange rate protection and the percentage of fixed charge they would like to earmark for adjustments linked to a weighted price index. While for payment purposes, the prevailing RBI rates could be considered, the exchange rate for evaluation would need to be indicated by the SEB in the bid document before hand. The FCC component that the bidder may ask for adjustments linked to a weighted price index could represent elements such as O&M costs comprising employee costs, cost of consumables, insurance etc. The SEB may also indicate the nature of tariff preferred from a private power project i.e. whether the tariff is to be front loaded, back loaded or an equated tariff stream that reflects the actual generation costs. The significant aspect in this design is that return on equity, incentive etc. are built into the bid and the market will determine the optimum rates. Even the tax, at the prevailing rates, would be required to be covered in the quoted tariff. The change in tax level due to future changes in tax structure would need to be addressed in the Power Purchase Agreement. It is important that the tariff structure fulfills the needs and aspirations of both the SEB as well as the project promoter/lenders as, until this is ensured, it is unlikely that projects in required numbers will close. It needs to be pointed out here that the ideal tariff stream for an IPP would be a higher tariff during the period when loan needs to be repaid and during the period the promoter gets the benefit of income tax exemption or concession and a lower tariff thereafter. Incidentally, even from the SEBs view point, a tariff stream with higher initial tariff works out to be more advantageous as the IPP gets the benefits of tax exemption and the concessions and the SEB and the ultimate consumers stand to benefit in terms of lower tariff. Additionally, in the beginning, the absorption of electricity at a tariff level reflecting the actual cost of power generation, would be relatively easier considering the fact that the private power will form only a small component of the power generated and supplied by the SEB. However, in order to ensure that the tariff proposals, based on a front loaded tariff structure, are not absurd, as has been observed in some of the cases, and are within the acceptable range, the SEBs may define the boundary conditions before hand. It would be desirable to indicate the maximum first/second year FCC and the rate at which tariff reduction is desired by the SEB during the debt repayment period. Since, the general perception is that notification of even the ceiling tariffs does not serve the desired purpose fully and the ceiling tariff effectively becomes floor tariff, it is suggested that the SEBs, instead of notifying any absolute number for ceiling tariff indicate the same in terms of levelised tariff say 1.3 times the levelised tariff for the I/II year tariff etc. This permits the market forces to operate freely in determining the FCC while at the same time sets out the boundary conditions also.

If the tariff is back loaded i.e. initially it is kept low and is allowed to increase with time, the supplied electricity in the later stages of operation becomes much more expensive for two reasons. Firstly, the debt servicing is planned in such a way so as to get the back loading effect. This results in substantial debt, mostly in foreign exchange, to be carried forward and hence the impact of FE variation on the Fixed Cost Component of tariff is much more pronounced. Secondly, as the tariff increases with time, the tariff during the years IPP does not get the benefit of tax concessions increases substantially increasing his profit as well and making the IPP liable to pay heavier taxes. Even though the taxes are not a pass through in the proposed revised tariff structure, the IPP is likely to load the increased tax burden on the tariff only - which would ultimately be borne by the SEB. An equated tariff for the entire PPA period leads to a low or negative return during the period of tax-holiday and a much higher return thereafter leading to a higher tax-liability, thus increasing the payment liability for the SEB.

1.2 Variable expenses: Variable charge would depend on the heat rate over the life of the project and the cost of fuel. The IPP is in no position to take a risk on the fuel price and this needs to be left to adjustment linked to the relevant fuel price index or to the price of fuel at which procurement is actually made by the IPP. Of course, in such cases,-- the procurement would have to be made on transparent procedures with the concurrence of SEB to ensure a minimum price. In case of indigenous fuel, the current administered price would have to be referred. The bidders can in their bid indicate a heat rate and proposed annual deration. This will enable the bidder who is offering the lowest heat rate, which will translate into lowest variable charge, to get suitable weightage.

2.0 Time Schedule for Project Development

2.1 It is suggested that for development of the proposal, a fixed time schedule be followed by the States. The experience so far has been that in majority of the cases, the processing of the project proposal takes inordinately long time. This not only postpones the availability of new capacity, it also severely hampers the project formulation/ development process. Because of the indefinite time frame, no meaningful discussion with the lenders/financiers is possible nor is it possible to come to even a fairly accurate estimate of the soft costs of the project. This results in mostly unrealistic assessment of risks and hence the soft cost element of the project cost leading to inflated project costs, controversies, repeated and prolonged negotiations and delays. For the power projects to come up in time it would be essential that the proposals are accorded all required clearances within a specified period of decision on project promoter. To achieve this, the following steps could be considered;

a. Project Formulation

Initially, for the process of private participation to really gain momentum and get streamlined, it must be realized that project development can not be left to promoters alone. The State governments would be required to provide as much support to the developers as possible. It is therefore, proposed that at least for the first few projects the State authorities should carry out the preliminary activities such site survey, land acquisition, tying up of necessary inputs or at least identification of their respective sources etc. This should not be difficult to implement given the manpower and expertise available with the SEBs.

b. Statutory Clearances

The Government has been streamlining the process of obtaining clearances for a new power project to make it less time consuming by way of clear-cut guidelines/ norms and delegation. However, in order to reduce the time required for project clearances, States may initiate process for obtaining clearances for the project and the clearances once obtained for the project could be transferred to the IPP identified after competitive bidding.

3.0 Time Schedule for Evaluation of Proposals

3.1 It is proposed that the time schedule for evaluation of proposals be kept as THREE months from opening of offers. However, to make this feasible, it would be required that the process of evaluation is streamlined and made time bound. Development of computer models based on the evaluation parameters finally selected by the States, could also be considered for completion of bid evaluation process expeditiously.

Sl.No. Activity Schedule
1. Conceptualisation of project, collection of preliminary site data, preparation of Pre-FR, RFQ notification, initiation of land acquisition activities etc.
 
0 - 3 months
2. Completion of pre-qualification activities, bid solicitation, initiation of process for clearances
 
3 - 6 months
3. Bid evaluation and finalisation of project promoter, obtain all clearances, land acquisition
 
6 - 9 months
4. Negotiations for project financing, security packages etc.
 
9 - 12 months
5. Commencement of project construction
 
after 12 months

4.0 Bid Solicitation Process

4.1 Since the project promotion would be through competitive bidding, for bringing in transparency and effectiveness in the bidding process, the State Governments/SEBs would be required to prepare detailed documents for Request for Qualification and Request for Proposal.

4.2 Request for Qualification

4.2.1 Through a Request for Qualification, the State Government/SEB would seek information from the bidder about

- Managerial capability of the bidder

- Financial standing of the company/promoters

- Past experience of the bidder/promoters in the field

- Technology and type of plant proposed

However, for the bidder to decide on the technology/system to be selected for the project, the RFQ document should furnish some general information about the project as indicated in Annexure - I(A to C). To facilitate development of RFQ/RFP document, Ministry of Power has already circulated the RFQ/RFP documents developed and used by some of the States in bid solicitation. In addition, a model RFQ/RFP document developed by an international consultant has also been circulated.

4.2.2 In order to eliminate non-serious bidders, it is proposed that the system of an earnest money deposit, a signature bonus (per MW of the proposed installed capacity) and also a separate development security that is related to timely implementation of the project be introduced by the States. While the earnest money deposit and the development security be refunded if the bidder is selected and the projected gets implemented as per the agreed schedule, the signature bonus need not be refundable.

4.3 Request for Proposal

4.3.1 After short listing of the bidders on the basis of Pre-qualification evaluation in the RFQ stage, the State Government/SEB would invite detailed proposal from the bidders for project implementation through A Request for Proposal document. Some of the information, the bidders would be required to furnish are at Annexure-II. These would form the basic response evaluation parameter and are discussed in subsequent paragraphs. A tentative weight assigned to each of these parameters is also indicated below. The level of despatch would have to be decided by each State depending upon the load curve and accordingly the weights would have to be assigned to these parameters. The components of fixed cost and variable cost would also vary from State to State and depending on the type of project.

5.0 Plant Availability and Despatchability. In any period, the Availability Factor of the power station or unit shall be calculated as follows:-

1003ACUnit

Avi = __________________

(Ccontracted )I* ni

Where,

Avi is the Availability factor for the Power Station or Unit in period >I=(expressed as a percentage)

3ACUnit is the sum of Available Capacities of all the units in each >Settlement Period=

(Ccontracted )I Contracted Capacity of the Power Station/Unit in the period >I=

ni is the number of >Settlement Periods= in the period >I=.Settlement Period means any thirty(30) minute period beginning on the hour or half hour.

In the operational phase, the Plant Availability would be required to be declared by the IPP before hand and SEBs would need to announce penalties for misdeclaration of availability. These would have to be laid down in the PPA document to be circulated with bidding papers.

5.1 Considering the substantial variations in the grid demand, the States could notify, in advance, the dispatchability level of around 50% of plant capacity.

6.0 Inter-Currency Risk

6.1 Initially, the SEBs may opt for a single foreign currency proposal (say US Dollar) to make the bid evaluation process simple and less time consuming. SEBs , in that case, would be required to clearly indicate in the bid document that any inter currency risk will have to be fully borne by the bidder.

EVALUATION PARAMETERS

7.1 Evaluation of the above bid aspects is much simpler than entering into the cost elements and assessing their reasonability. However, it must be noted that the key lies in obtaining serious bids from several credible bidders. This can be made possible only if the project is sufficiently well prepared in terms of site acquisition, clearances, inputs etc. so that the bidder can realistically estimate the time frame within which development and project construction can be reasonably expected to commence. Only in such a situation will a bidder be able to indicate a firm price offer. The SEB should also be in a position to enter into a Afinanceable@ PPA, a draft of which must form part of the bidding document. Another aspect that the SEB needs to address is the nature of payment security mechanism envisaged and this should also form part of the bid document. This will go a long way in demonstrating the earnestness of the SEB and will facilitate in attracting serious, responsive and competitive offers.

7.2 Tariff for Evaluation of Proposal

7.2.1 It is proposed that the levelised tariff calculated for the tariff stream submitted by the bidder would be one of the major considerations for deciding the promoter/developer for the project. However, for the purpose of making payment for the supply of power generated by the IPP, the Variable Cost component of the tariff would be escalated as per the actual fuel price escalation and for the purpose relevant indices published by Government/ recognised bodies could be used( indices/ reference documents to be identified and indicated in the bid solicitation document).

7.2.2 The IPP would be required to furnish the tariff stream for the Fixed Cost Component for the life of the PPA. It would also be required to furnish the Fixed Cost Component and Variable Cost Component separately for the first and the second year of operation of plant.

7.2.3 As the actual debt servicing is to be adopted by the IPP for arriving at the FCC instead of a constant depreciation rate, as is being presently done, the FCC would decline at a rate proportional to actual repayment of debt. To get a lower FCC on account of soft costs, the IPP would try to get cheaper loans and structure the debt repayment schedule to get maximum cost advantage while remaining within the specified tariff band.

7.2.4 The bidder would be required to indicate the percentage of FCC which would be escalated to take care of escalation in O&M expenses etc. with time. The rate of escalation would be linked to the Whole Sale Price Index (WPI), Consumer Price Index (CPI), RBI Machinery Index, for expense on Indian personnel, spares and consumable items.

7.2.5 A typical cost structure for the IPP is placed at Annexure-III for illustration.

7.3 Levelised Tariff.

3tnini-1

Levelised tariff T shall mean T = ---------

3ni-1

Where,

d is the discount factor

n = 1 - d, and

t I is the tariff for the ith year.

For the purpose of tariff based bid evaluation, by comparing two different tariff streams, levelised tariff emerges as an effective tool. However, as the Power Purchase Agreements (PPA) are for the life of the project varying from 15 to 20 years in case of gas and liquid fuel plants and for 25 to 30 years in case of coal and lignite based plants and it has also been found that the impact of tariff increase in the later years, particularly beyond the 15 year period, on the Net Present Value (NPV) of the tariff stream, which is an important step in levelised tariff calculation, is quite insignificant. In order to ensure that the tariff proposed by the developer for the life of the project/PPA does not have any abnormal increase in tariff in the later years, it is strongly suggested that evaluation of proposals be carried out in atleast two parts. The entire PPA period can be divided in two parts -- debt servicing period and beyond -- and levelised tariffs calculated for these periods separately and compared.

7.4 FE Component

Considering the overall desirability of keeping the F.E component low and constraints of financial resource availability, the policy recommends higher rating for a lower element in the FCC for protection against foreign exchange fluctuation. The IPPs would be required to indicate the Foreign Exchange component in the Fixed Cost Component of the tariff as well as the escalable FE component . While evaluating the proposals, weightage could be given to the proposal with the lowest escalable Foreign Exchange component. The rate of FE variation would be determined by the RBI rates prevailing at the time of payment. The foreign exchange component can be reduced by sourcing equipment/services from the domestic market.

7.5 Heat Rate and Heat Rate Deration

7.5.1 Heat rate of any Unit/Station has a bearing on the ultimate tariff. It assumes greater significance in the event of fuel cost component of the tariff being fully pass through. In order to achieve a low overall tariff, it is not only essential that selection of systems and equipment design is done carefully but equally important is the fact that prudent plant operation & maintenance practices are not compromised with. However, as the Unit/Station Heat Rate is a function of level of plant operation/despatchability, it would be advisable that States call for Heat Rate curves for different despatch levels and major fuel characteristics from the bidders. For the purpose of bid evaluation the States can also indicate certain despatch levels such as 60%, 70%, 80% and 90% and major fuel characteristics such as certain percentages of moisture and ash in case of coal.

7.5.2 The other option in this regard could be to opt for the total variable charge without going into the operational details. The bidder could be asked to furnish the total variable charge for the life of the PPA which can be evaluated. However, this would require assumptions regarding fuel costs in future and the projections made in this regard may not be very accurate and hence could lead to distortions.

7.6 Auxiliary Consumption

7.6.1 The level of plant Aux. Consumption affects the Fixed Cost as well as the Variable cost component of the electricity tariff. Improper systems designs and choice of equipment could lead to higher Aux. Consumption and result in perpetual loss to the utility/SEB. To ensure proper selection of systems and also adherence to prudent O&M practices by the project promoter, Auxiliary Consumption has been suggested as an evaluation parameter.

7.7 Technical Features

7.7.1 In order to ensure use of sound technology and contemporary concepts in project formulation main technical features of the project has been recommended as a parameter for evaluation.

7.8 RESPONSE EVALUATION

7.8.1 It is proposed that for simplification of the evaluation process and for making it more market driven only the parameters having an impact on the tariff and plant efficiency be evaluated. The parameters indicated above are only indicative and States would be required to modify these parameters depending on their specific requirements. While deciding on the respective weights, the States may carry out sensitivity analysis based on a mathematical model. In any case States would be required to finalise the assigned weights before the bids are called for.

Note - 1: The proposed tariff structure is for competitively bid projects only structured for base load operation.

Note - 2: As the process of competitive bidding would lose its seriousness unless the security arrangements are made known to the prospective bidders in advance, it is suggested that a well structured Power Purchase Agreement (PPA) that addresses the concerns of the SEB and is bankable must be circulated along with the bid document. The model PPA developed through an international consultant has already been circulated and the same can be used for developing a project/State specific PPA.

Note -3: To expedite the process of competitive bidding and to attract serious bids, States are advised to obtain necessary statutory and non-statutory clearances for the project before the process of bid solicitation is initiated.
 


 

ANNEXURE-I

INFORMATION REQUIRED TO BE FURNISHED BY THE SEB TO THE PROMOTER

A. POWER SECTOR RELATED INFORMATION

- Electricity demand (preferably demand cycle also)

- Capacity required to be created at the site( possibilities of future expansion requirements)

- Type of project( base load/peaking load)

- Power evacuation requirements( Evacuation Voltage level etc.)

- In-principle clearance of the project by CEA before the project is put up for competitive bidding

 

B. PROJECT INPUTS

- Commissioning schedule for the project

- Type of fuel to be used

- Fuel source (in case of indigenous fuel)

- Fuel transportation requirements (in case of indigenous fuel)

Distance from fuel source

Means of transportation

- Approximate composition of fuel (in case of indigenous fuel)

Ash, moisture, and other chemical contents, calorific value etc

- Land details (including information about soil conditions)

Mode of transfer of land to IPP - whether land is to be acquired by the IPP or it would be leased to the IPP by the State Government, status of acquisition, procedure and approximate time and cost involved in acquisition

- Water source and its availability

- Water transportation requirements (approximate length of pipeline, pumping requirements, seasonal variation in availability, storage requirements etc.)

- Environmental requirements

- Social requirements (R&R plan if possible)

- Status of clearances, if any

- Despatch Level of the plant/Availability Factor

 

C. LEGAL INPUTS

- Income tax/Corporate Tax structure

- Environmental Norms to be adhered to during project implementation and operation

 

D. INFORMATION REQUIRED FOR BID EVALUATION

 

- Nature of tariff (Front loaded/Back loaded/Equated tariff)

- Ceiling First/Second Year tariff

- Rate of tariff reduction during the debt repayment period

- Discounting rate for calculation of Levelised Tariff

- FE escalation rate (say 5%)and base exchange rate (Rs. 35 = 1US$)

- Life of PPA -

- Nature of project development - BOO/BOOT - fate of the assets after PPA term

- O&M escalation formula

- Any other appropriate project specific Information


ANNEXURE-II

INFORMATION TO BE FURNISHED BY THE BIDDER

General Information about the project

- Unit configuration

- Commissioning schedule from date of Financial Closure

- Broad system details

 

Project Financing

- Tentative Debt: Equity ratio (domestic/foreign)

- FE component including details of foreign currency (It is proposed that for the present SEB restricts the choice of FE to US$ for simplification of the process)

 

Information Required for Bid Evaluation

- Tariff Stream

- Fixed Cost Component

- Variable Cost Component( first two years)

- Foreign Exchange Component in the Fixed Cost component of tariff

- FE component - non escalable

- FE component - escalable

- INR component

- Escalable

- Non-escalable

- Station Heat Rate

- Heat Rate deration rate

- Level of Aux. Consumption (%age of generation)

 


ANNEXURE-III

A. Typical cost structure for the IPPs

Elements of Tariff FE Component INR Component Remarks
Escalable Non-escalable Escalable Non-escalable
Fixed Cost Component Escalable Non-escalable Escalable Non-escalable * IPP can chose not to insist for protection against FE fluctuation for part of these liabilities

** Protection against foreign exchange variation.

Interest on Loan Yes**   No  
Loan repayment Yes   No  
Return on Equity Yes Yes* No  
Insurance Yes   No  
Income/Corp. Tax     No  
Interest on Working Cap     No  
O&M expense Yes Yes* Yes Yes
Variable Cost Component        
Fuel Cost        
B. What the IPP Quotes based on A.
Bidder is required to furnish the tariff stream for the life of PPA for these items
SI.No Components of the tariff Remarks
1. Portion of the tariff on which FE escalation will be claimed at actuals For bid evaluation purposes FE exchange rate variation of say 6-8% on base exchange rate of say Rs. 35 to a USD. In actual practice the promoter would get actual exchange rate neutralisation
2. Portion of the tariff on which no escalation would be claimed  
3. Portion of the tariff on which local inflation would be claimed This need not necessarily be the domestic inflation rate. As this would be linked to number of factors such as cost of consumables, salaries etc.
4. Variable cost component This would qualify for only price changes of fuel as per actuals